Fiscal multipliers in downturns and the effects of Euro Area consolidation

ABSTRACT

We estimate the impact of the fiscal consolidation actions in the Euro Area between 2011 and 2013 on output and public finances. We identify the discretionary fiscal consolidation effort based on new data by the European Commission. We combine these data with robust estimates from a rich meta-regression analysis on multipliers for various fiscal measures under different business cycle regimes. The frontloaded consolidation came at a considerable cost with an output loss of 7.7% and only a small gain to the primary balance of 0.2% of GDP. Backloading would have been much less costly due to lower multipliers.

KEYWORDS:

• Fiscal policy
• fiscal multipliers
• fiscal consolidation
• Euro Area

JEL CLASSIFICATION:

• E27
• E62
• H30

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Based on Eurostat data, it equalled 6.7%, 6.8% and 5.9% in 2011, 2012 and 2013, respectively. By contrast, the sample average equalled 22.8%. As extra-Euro area imports are not available for some small Euro area members, our estimates are based on Belgium, Germany, Ireland, Greece, Spain, France, Italy, Cyprus, Latvia, Netherlands, Austria, Portugal, Slovenia, Slovakia and Finland.